Nigerian South African Chamber of Commerce

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PAYMENT SYSTEMS AND FINANCIAL INNOVATION IN NIGERIA

Posted on: 04 May 2017

In Nigeria as it is in many developing countries, cash has been the most prevalent mode of payment. This makes the country to be heavily cash – based economy. However, the cost of cash to Nigeria financial system is high and increasing. It is in this regard, that the Central Bank of Nigeria (CBN) introduced the cashless policy with the objective of promoting the use of electronic payment channels instead of cash. It posited that the move towards a cashless Nigeria brings with it numerous benefits but there is still the need to create more awareness to entice the numerous unbanked Nigerians into the banking system.

Cash is not a friend to any economy, the underline objective of the CBN is to get rid of cash. It is not a friend to any business owner. Using cash has a lot of disadvantages that outweigh its advantages.

African economies are in support of driving cash out of the financial system and the introduction of digital payment solutions is in line with their cashless strategies. Businesses in the continent need smart solutions that will provide efficiency, but also offer convenient ways to track and monitor expenditure.

One of the prerequisite for the development of national economy is to encourage a payment system that is secure, convenient, and affordable. In this regard, developed countries of the world, to a large extent, have moved away from paper payment instruments toward electronic ones, especially payment cards. In these countries, for instance, it is possible to pay for a vending machine snack by simply dialing a number on one‘s phone bill.

In recent times, the mobile phone is increasingly used to purchase digital contents (e.g. ringtones, music or games, tickets, parking fees and transport fees) just by flashing the mobile phone in front of the scanner at either manned‘ or unmanned point of sales (POS).

Experts argued that cash differs from other payment instruments in the following regards; it circulates, it is always valuable, it provides full and final settlement for a transaction, it allows for anonymity, once issued, the circulation of cash is uncontrolled; it is regarded as public good by its users.  However, the cost of cash to Nigeria financial system is high and increasing; the cost of printing is high. Other challenges resulting from high-cash usage among others include; robberies and cash-related crime, revenue leakage arising from too much of cash handling, inefficient treasury management due to nature of cash processing, high subsidy, high informal sector etc.  Against these backdrops, the CBN introduced the cashless policy in April 2011 with the objective of promoting the use of electronic payment channels.

Furthermore, Innovations in high tech IT payment applications and business models have come with a chain of benefits for businesses, Agada Apochi, CEO, Unified Payment Services Limited made this known at the gathering of business stakeholders while speaking on the topic payment systems and financial innovation in Nigeria.

According to him, The Nigerian economy is one of the fastest growing economies in the world, largely attributed to its growing population and abundant resources, which has also made Nigeria an attractive market for investors.

He argued payment system in Nigeria has improved over time, evolving from a manual processing of transactions to a semi use of technology,” however this evolution has only been at the banking end, hence a need for end user experience.”

Apochi added that the evolving eco-system of payment in the country is proffering massive dynamics in the e-commerce industry enabling customers to pay for goods and services,  receive money transfers  as well as providing retailers with efficient and ease to integrate tool for accepting online, offline and NFC Payments.

“Innovations in high tech IT applications and business models will no doubt improve service greatly and also provide for efficiency and safety in payment systems,” he said.

Giving details, he said for Businesses / Corporate there is revenue Assurance; blocking revenue leakages; provides for audit trail; increases accountability; low financial risk;  growth in sales; credit availability; impulsive purchases; international patronage; cost reduction; cost handling of cash is reduced; reduced theft/crime; reduced bank charges i.e CBN new cash policy; low/Zero cost of branch network; multiplying merchant retail oulets through innovative; payment solutions e.g Payarena on the web, POS, ATM;  reduction in cost of fund; printing cost; cost to bank; impact on lending rate; simplify dispute management

For individuals, he listed increased convenience; more service options; reduced risk of cash-related crimes;  cheaper access to (out-of-branch) banking services, access to credit and financial inclusion and account could be accessed almost anywhere in the world.

Regarding benefits for government, he has increased tax collections; greater financial inclusion; infrastructure development; accountability; budget and planning and increased economic development.

A secure cashless system can guarantee anonymity of legitimate users but also provides traceability about illegally issued cash or laundered money.

Cashless policy can help deepen bank deposits thereby increasing funds available for commercial engagements.

The policy can also help trace double spending, and double spending protects content by exposing the double spender‘s identity, digital cash is a fool proof way of guarding against illegal redistribution of intellectual property and materials.

Cashless policy can help displace shadow economies, bring hidden transactions into the banking system and increase transparency, confidence and participation in the financial system.

Automated electronic payments which is an integral part of cashless policy, acts as a gateway into the banking sector and as a powerful engine for growth. Such payments draw cash out of circulation and into the bank accounts, providing low cost funds that can be used to support bank lending for investment-a driver of overall economic activity. The process creates greater transparency and accountability, leading to greater efficiency and better economic performance.

The Unified Payments CEO reeled out the following success stories of financial payment innovation:

  • The acceptance of EMV Chip & PIN technology which is Pioneered and issued by Unified Payment Services Limited has been used to address ATM fraud related issues by over 95% in Nigeria.
  • Challenges of electronic payments in Nigeria due to poor telecommunication Infrastructure now leveraging on the NFC (Near Field Communication) technology is in the forefront with PayAttitude, an online/offline NFC payment solution to solve and also guaranty electronic payments successes in Nigeria.
  • Value Added Service platform such as the Payarena driven by Unified Payments Service Limited offers convenience such that from the comfort of your home or office with your computer workstation, Laptop, Tablet and other mobile or handheld device or by visiting the nearest POS and ATMs, Airtime vending Bills payment or Utility services payments can be made on a 24/7 basis.
  • Convergence of Multiple Bank Accounts on single platform – One App, All Banks: PAYATTITUDE.

Cashless economy does not refer to an outright absence of cash transactions in the economic setting but one in which the amount of cash-based transactions are kept to the barest minimum. It is an economic system in which transactions are not done predominantly in exchange for actual cash. A cashless society possesses the following characteristics; All the money used is issued by private financial institutions (banks, and possibly other firms). It is conceivable that the central bank continues to operate like other banks, issuing its own deposits that could be used as money in the same way as other bank deposits are. However, in that case the central bank has no monopoly in the issue of Money.

In a cashless society the unit of account (e.g.  Dollar, euro) remains a national affair and is provided by the state. The followings among others enhance the functioning of cashless economy; e-finance, e-banking, e-money, e-brokering, e-exchanges etc. In a modern economy, the use of non-cash payment methods such as cards (credit and debit) dominates the use of cash in payments.  The card based payment system has several players.

On the one hand, are the providers of the card based payment system- first of which is the card companies like MasterCard and Visa who provide their payment network for the system to function. The second sets of providers are the banks that act as acquirers for merchants and issuers for cardholders and reach the card payment services to the ultimate users. For these two parties, the card payment system is an income generating initiative and they are motivated to run the system as they are able to generate adequate profits out of their operations. On the other side of the system are the users- both merchants and cardholders.

The benefits these two players derive from the system are manifold- the convenience of electronic transactions, the ease of credit availability, increased sales, increased purchasing power, to list a few. Since they are the end users of the convenience the card payment system generates, they are the ones who bear the cost of the system. Apart from these four players there is the regulator of the payment system, usually the central bank of the country. The card based payment system cannot function in absence of any of its players.

The outright volume of these payments only remains heavily concentrated in developed markets. Developing countries are just improving their payments infrastructures, enabling wider adoption and greater usage of non-cash means and channels.

However, the global use of cash payment is still endemic, especially for low-value retail transactions. But while cash may be convenient, it makes taxation less transparent, and it is costly to distribute, manage, handle and process. It therefore follows that; cash as a mode of payment is an expensive proposition for any government.

Nigeria’s cash based economy is characterized by the psychology to physically hold and touch a payment medium like cash; a culture informed largely by ignorance, illiteracy and lack of appreciation of the merits of digital payments system like Smart Card, Debit Card or electronic funds transfer.

Despite the overwhelming superiority of electronic payment systems, business-to-business

transactions are still predominantly consummated in Nigeria with the use of cash and to a limited extent bankers’ cheques or certified cheques. The time lag between cheque lodgments and receipt of value as well as the high risk of fraud associated with such payment medium makes e-payment system a preferred alternative. However, the Nigeria Automated Clearing System (NACS) which has been in operation for about some years was set up with the objective to significantly reduce clearing days and militate against fraudulent transactions.

Effective payment system is a vital part of financial infrastructure of any economy. By enabling commercial transactions to be completed faster, safer and cheaper, it would have positive impact on economic growth and global competitiveness.

He mentioned the following payment instruments in Nigeria’s financial sector which he said have started  to attract a great deal of attention: such as cards, NFC-Contacless, mobile app, cheque, cash, RTGS/NEFT and mobile:

Internet Banking

Given the overwhelming success of on-line banking, banks in Nigeria are gradually embracing Internet banking and radical changes are beginning to take place in the Nigerian financial landscape. Customers are increasingly raising the stakes of expectations for quality customer services.

GSM/Mobile

Banking (M-Payments), M-payments could be deployed either through the short messages service (sms) or phone calls. With the roll-out of GSM in Nigeria in August 2001, customers are beginning to savour this service delivery channel.

Electronic Money

A generic name for plastic money and other forms of e-payments such as:

Smart Card/Valucards:

Smartcard is already operational in Nigeria under the brand name of Valucard. The company (Smartcard Nigeria Plc) acts as settlement agent as well as Coordinate hardware and software supply, while participating banks serve as card issuers. Its transactions are however not yet online.

Nigeria could easily replicate the South African success story where tremendous progress has been made in the use of Smart Cards. This is very impressive and worthy of emulation. In South Africa, smart cards are being put to use in various areas: salaries, pensions, car parks, post offices, cinemas and stadia.

Credit Cards:

The revolving credit on the card allows repayment installmentally. The credit that is granted is either settled in full by the end of a specified period or settled in part, with the remaining balance extended as credit. International credit cards such as Visa and Master cards are known to customers and accepted by merchants. Credit cards are also easy to use on the

Internet, as only the credit card details need to be sent to the beneficiary in order to effect payment.

Debit Cards:

This is directly linked to savings or current accounts. The use of debit cards for purchases on the Internet is still limited.

Automated Teller Machine (ATM)

A complex self service station for cash withdrawal, account information, credit transfers and cash deposits. ATM and credit card networks are linked in such a way to enable credit card holders of any bank that operates with similar protocol to use it in any machine.

One of the ways to grow and encourage the use of Automated Teller Machine (ATM) cards is for banks to form partnerships and jointly own a switch network which will electronically link all the banks’ various ATMs. This has seriously influenced the recent establishment of inter-switch network by some Nigerian banks in collaboration with Accenture and Telnet.

Apochi said that the benefits of e-payment systems can only be realized if sufficient measures are put in place to ensure that the Nigerian public has confidence in the system.

The establishment of an efficient central switch network is a fundamental prerequisite to developing innovative payment system in the Nigerian financial market. Public and private sectors should be encouraged to collaborate in order to fast forward the digital revolution in Nigeria.

According to him, Payment systems in Nigeria during the past few years have undergone

significant progress, but some transactions are still cash based. Nevertheless, Nigeria has the basic infrastructure to implement the policy. There is therefore the need to create more awareness to entice the unbanked people into the banking system. Larger percentage of the Nigerian population is unbanked and going cashless will automatically get more people into the banking system. Most Nigerians are not aware of the benefits of electronic payments and are therefore slow to adopt it.

It is also further recommended that strategic segments of the economy be the subject of focus first especially the unbanked segment. In that way the vision of reducing the unbanked will be done gradually and systematically.

The e-payment  system, if well implemented  will help achieve the CBN‘s objective of expanding, deepening and  modernizing the payment system in Nigeria and also galvanize the CBN in ensuring that Nigeria ranks among the  top 20 economies of the world in line with the nation‘s vision 2020 aspirations. The policy will also break the traditional barriers hindering financial inclusion for millions of Nigerians and bring low cost, secure and convenient financial services to urban, semi-urban and rural areas across the country especially through the mobile payment services.